BlackRock on Munis: Expect Capital Preservation, Not Much More

By Michael Aneiro

BlackRock says any period of price appreciation in the muni bond market this year is pretty much over and investors should expect little more than capital preservation from here:

We maintain a neutral duration posture ahead of what we expect will be a more volatile period. Supply traditionally increases toward year-end, and although it will not likely overwhelm demand, it may match it in the near-term…. Overall, we are focusing on income and capital preservation, as the majority of the market’s capital appreciation potential has likely been realized this year.

Strategically, BlackRock is overweight in state tax-backed and essential service bonds, as well as dedicated tax bonds, while it’s underweight in land-secured bonds, student loans and local tax-backed issuers. BlackRock adds that recent hurricane-related damage in the Northeast should have minimal muni impact:

[P]ast natural disasters have not been a precursor to defaults and we expect the same to be true in this instance. In the past, FEMA has typically covered 75% of clean-up costs. New Jersey and New York locals also tend to benefit from strong state oversight.